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in stock market i find the term futures and options ? what
was the meaning of that sensex futures and options
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Answer Posted / kalyani
future
A financial derivative which represents a contract sold by
one party (option writer) to another party (option holder).
The contract offers the buyer the right, but not the
obligation, to buy (call) or sell (put) a security or other
financial asset at an agreed-upon price (the strike price)
during a certain period of time or on a specific date
(excercise date).
options
options are 2 types
1. call option
2. put option
a Call Option gives its buyer the right to buy 100 shares
of the underlying security at a fixed price before a
specified date in the future-usually three, six, or nine
months. For this right, the call option buyer pays the call
option seller, called the writer, a fee called a Premium,
which is forfeited if the buyer does not exercise the
option before the agreed-upon date. A call buyer therefore
speculates that the price of the underlying shares will
rise within the specified time period. For example, a call
option on 100 shares of XYZ stock may grant its buyer the
right to buy those shares at $100 apiece anytime in the
next three months. To buy that option, the buyer may have
to pay a premium of $2 a share, or $200. If at the time of
the option contract XYZ is selling for $95 a share, the
option buyer will profit if XYZ's stock price rises. If XYZ
shoots up to $120 a share in two months, for example, the
option buyer can Exercise his or her option to buy 100
shares of the stock at $100 and then sell the shares for
$120 each, keeping the difference as profit (minus the $2
premium per share). On the other hand, if XYZ drops below
$95 and stays there for three months, at the end of that
time the call option will expire and the call buyer will
receive no return on the $2 a share investment premium of
$200.
The opposite of a call option is a Put Option which gives
its buyer the right to sell a specified number of shares of
a stock at a particular price within a specified time
period. Put buyers expect the price of the underlying stock
to fall. Someone who thinks XYZ's stock price will fall
might buy a three-month XYZ put for 100 shares at $100
apiece and pay a premium of $2. If XYZ falls to $80 a
share, the put buyer can then exercise his or her right to
sell 100 XYZ shares at $100. The buyer will first purchase
100 shares at $80 each and then sell them to the put option
seller (writer) at $100 each, thereby making a profit of
$18 a share (the $20 a share profit minus the $2 a share
cost of the option premium).
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